On Following Your Heart…

“Remembering that I’ll be dead soon is the most important tool I’ve ever encountered to help me make the big choices in life. Because almost everything, all external expectations, all pride, all fear of embarrassment or failure; these things just fall away in the face of death, leaving only what is truly important. Remembering that you are going to die is the best way I know to avoid the trap of thinking you have something to lose. You are already naked. There is no reason not to follow your heart.” — Steve Jobs

The valuation of income properties is directly tied to the cost and structure of financing. Real estate is a “borrowed money” business. As interest rates rise, the capitalization rate required to service the debt for a purchase or refinance also rises, and thus the valuation falls. As the valuation falls, existing debt Loan to Value (LTV) ratio exceeds the agreed maximum for commercial lenders, thus forcing a “margin call” on commercial debt that borrowers cannot pay, causing a technical default. Then the tide flows out and everyone sees who has been swimming naked. Commercial banks will crater and the FED will desperately try to print more counterfeit money at the expense of the tax payer to buy the bad debt.

Class C “Bread and Butter” apartments with high debt coverage ratio (DCR>1.5) can tolerate recessionary pressure on income and expense, but avoid Section 8 and Low Income Housing Tax Credit (LIHTC). Also try to refinance or buy now with FHA fixed rate with no balloon, amortized 25 years or longer and no prepayment penalty. You will be able to pay off the debt with debased “Bernanke Bucks”.

I just wrote an article about my preferred structure for structuring the equity financing with senior equity, preferred equity, and common equity.

A syndicator that raises private equity may consider an equity waterfall that is similar to a combination of debt and equity. Treat the senior equity like a 1st lien and the preferred equity like a 2nd lien, with a debt-like structure with a fixed annual rate, amortization term, and rolled-in points. An amortization schedule shows…

I am often astonished at the real estate “Guru” who charge outrageous (unpublished) interest rates for their products. As if their astronomical pricing isn’t bad enough, they offer time payment plans that are nothing short of usurious, making high credit card interest rates seem reasonable in comparison.

I recently sat through a yet another long-winded video pitch for an over priced product. At the end of the pitch (interspersed with assertions of the “good life” with easy riches), the price tag came in at $497 for a single payment, or three monthly payments of $175. You can choose to pay on your credit card $497 now, or three payments of $175 totaling $525. That seems reasonable, right? A $28 finance charge for the convenience of spreading out your payments doesn’t seem so bad, when you consider it’s a $497 product. Yeah, right!

First, why would you need to spread out the payments when buying on a credit card? Most credit cards allow paying off a purchase over time. Is your credit card maxed out? Then why are you buying yet another guru product when you can’t even manage your own personal finances?

Next, what is the effective annual interest rate on that time payment purchase? Three payments of $175 with the first payment now, leaves $322=$497-$175 to pay over the next 2 months. Get out your financial calculator, plug in 2 payments, Present Value $322, periodic payment -$175, Future Value zero, and solve for the interest rate. That comes to 68.92% annual interest rate! You would be better off just paying the full price and paying off your credit card at a 20% annual interest rate (less than one-third of the guru interest rate).

The guru is preying on financially illiterate folks who are desperate for a solution to their money problems. (Hint: They have money problems precisely because they are financially illiterate!) This is one of the ways that I filter out the greedy online marketers. Is their price reasonable considering the amount of real content versus puffery? Are they truly committed to their customer’s success? Or are they just trying to squeeze out every last penny from anyone desperate, foolish or naïve enough to fall for their latest pitch of easy riches?

If you are truly focused on getting out of personal debt, then take a look at my Excel 2007 spreadsheet Power Debt Plan by clicking here.

What if you are so broke that you can’t afford Microsoft Excel 2007? Just buy a $7 thumb drive (also called a “Flash Drive”) at Best Buy or Staples to hold your computer files, go to a public library and plug into one of their computers that already has Microsoft Office 2007 or later. Buy my product, download it and save it on your thumb drive. Then run the numbers on the public computer. I show you how to do it with several mp4 video tutorials. You can download a free mp4 video player for your Windows or MAC computer from QuickTime.com.

Financial literacy is the key to financial freedom. Take the first step by understanding what your personal debt is really costing you, then make a plan to get out of your personal debt by clicking here.

I just added a new article on the correct way to calculate the Capitalization Rate (CAP) according to the cost and structure of financing.

An income property is generally valued on its cash flow, either the current cash flow or the anticipated future cash flow after repositioning. The valuation of the cash flow is calculated according to the cost and structure of the available financing at the time of purchase or refinancing.

I just made a major update to the very affordably priced “Introduction to Income Valuation and Syndication” course. With the sophisticated macro-enabled Excel 2007 ProFormaStabilized.xlsm spreadsheet, you can now generate a multi-page PDF presentation package for syndicating to your private financiers or for submitting a loan request to a commercial lender. There are several tutorial videos showing how to use the spreadsheet and its presentation worksheets. Generating the package is just a point-and-click away!

Customers with active purchase plans will receive free download links via email for the update. If your purchase plan has expired or you want to learn how to get paid to buy income properties with Other People’s Money, then you can buy the course (click here for the sales page). Watch the YouTube versions of the tutorial videos on the sales page!

There’s even a bonus “mini course” with tutorial videos on taking over income properties with the Master Lease and Option strategy for no money down. It’s included at no extra cost!

This update proves my commitment to your success by updating my courses with the latest features and educational content. My students have already reported earning several thousands of dollars by using the strategies and techniques that I teach in my downloadable courses.

You won’t pay thousands of dollars like those Guru want to charge for their courses. I don’t want my prices to be a barrier to your success! I always offer a 60-day money back guarantee. If you’re not happy, then I’ll immediately refund your money with no questions asked. My refund rate is the lowest in the industry, because my customers recognize the awesome value of my courses. They cannot get my educational content or sophisticated software anywhere else at such a low guaranteed price! This is software that I personally use for my own real estate investing!

I added a powerful spreadsheet for calculating and generating invoices for the Ratio Utility Billing System (RUBS). There are 2 video tutorials showing how to use the spreadsheet and how to generate the mail merge templates. The spreadsheet supports unlimited number of residents, you can bill pro-rated for electric, gas, water, sewer, or any combination thereof (selectable at the resident record). The spreadsheet calculates the pro-rations by square footage, or the number of persons occupying the unit, or both. You can generate a mail merge worksheet for Microsoft Word to generate invoices for printing or PDF files for emailing.

You can watch the YouTube versions of the tutorial videos by clicking here and here.

The “Introduction to Income Valuation and Syndication” course is available by clicking here.

I just uploaded a major update to my course “Introduction to Income Valuation and Syndication” (at http://bit.ly/itivas-1) that updates the ProFormaStabilized.xlsm spreadsheet and a new video tutorial for generating a PDF finance package.

The course is updated with more improvements for the MasterLeaseAndOption.xlsm and for the ProFormaStabilized.xlsm spreadsheets. A new video tutorial is added for demonstrating how to perform “what if” calculations on actual operating data. Check out the course by clicking here.

A quick note that I just updated the ProFormaStabilized.xlsm spreadsheet to include an “actual data” input column and a “Seek Actual” button. The button calculates the required gross Return on Equity (ROE) and net cash flow required for the specified actual operating data. Now you can use the spreadsheet to calculate a required Capitalization rate for a specified financing structure or to calculate the ROE for the specified actual operating performance parameters.

Low interest rates are very enticing. I want to suggest caution, because an increase in interest rates will dramatically affect the value of real property. Real estate is a “borrowed money” business. The cost and structure of financing determines the income valuation of the property. Similar to bonds, the value varies inversely to the yield (interest rate). As rates go up, the value goes down.

Suppose you buy a house for $200,000 and put down 20% ($40,000), and finance the 80% balance of $160,000 at 3.5% fixed rate over 30 years (360 payments of $718.47). The days of fully assumable residential loans are probably long gone, so your buyer will be forced to bring in new financing at a higher cost, which means a lower purchase price. Suppose rates jump to an astronomical 5.5%? The increase of just 2 percentage points will drop the serviceable debt load to $126,538. Divide by 80% to calculate $158,173, which is what the next buyer can afford to pay for the house at the same monthly payment of $718 and 20% down payment. That’s a whopping 21% price decline and your equity investment is wiped out. That’s a true real estate crash.

If rates are expected to go up, then calculate what your refinance or resale value will be in the future and work backward to determine what the property can afford to pay today.

Hedge funds are heavily investing in foreclosed houses and they are paying all cash to get a minimal 6% annual yield. After a few years and an increase in loan rates, those hedge funds will try to recover their equity by selling the houses to buyers that must obtain debt financing. Either the hedge fund must offer seller financing with long term, low interest rates or they will take a haircut (price reduction) for a buyer that must obtain higher cost institutional debt. Hedge funds that now are paying all cash for low yields may become the next wave of motivated sellers when interest rates increase.

Always consider your prospective investment according to what it costs to get in and what it costs to get out.

Disclosure Statement

This is not an offer to sell, or solicitation of offers to buy, securities in states where such offer of solicitation cannot be made. This is not an offer to residents anywhere prohibited by state statutes. This website or advertisement shall not constitute an offer or solicitation to sell or buy securities in any state where registration of the security is required or where such solicitation or offer cannot be made.